Tax Prep for the New Year

The start of the year is the perfect time to begin preparing for taxes. It may feel a bit overwhelming, but breaking it down into small steps can make the process much easier. Here’s a simple guide on what you need to do for taxes at the beginning of the year:

Organize Your Documents

Gather all necessary financial documents. These include:

• W-2 forms (if you’re employed): These show your income and tax withheld from your job.
• 1099 forms (for contractors or freelancers): These show any additional income you earned outside a regular job.
• Receipts for deductions: If you plan to claim tax deductions (like for home office expenses or charitable donations), start collecting receipts now.
• Health Insurance forms (like 1095-A): If you had health insurance through the marketplace, you’ll need this form for your taxes.

Review Your Withholding

Review your tax withholding—how much your employer is taking out of your paycheck for taxes.

• If you received a large refund last year: You might want to adjust your withholding so you get more of your pay throughout the year.
• If you owed a lot when you filed taxes: You may want to increase your withholding to avoid another surprise at tax time.

Consider Making Tax-Advantaged Contributions

You can reduce your taxable income by contributing to retirement accounts or health savings accounts (HSAs). Consider making the following contributions:

• 401(k) or IRA: Contributing to retirement accounts like a 401(k) or IRA can lower your taxable income. Even if you can only contribute a little, every bit helps.
• HSA (Health Savings Account): If you’re eligible, you can contribute to an HSA. The contributions are tax-deductible, and they can help with medical expenses.

Update Your Personal Information

If you’ve had any major life changes—like marriage, divorce, having a child, or moving—make sure your information is updated with your employer. This is important for both your W-2 withholding and your tax return.

Set Aside Money for Taxes (If You’re Self-Employed)

If you’re self-employed or earn freelance income, you’ll likely need to make estimated tax payments throughout the year. At the start of the year, set up a budget or savings plan to set aside money for these payments. That way, you won’t be caught off guard when the IRS comes calling.

Check Your Tax Filing Status

Your filing status determines how much tax you pay. At the beginning of the year, think about whether any changes in your life could affect your tax filing status. For example:

• Married? You’ll likely file jointly or separately.
• Children or dependents? If you’ve had a baby or are now claiming someone as a dependent, this could affect your deductions or credits.

Track Your Expenses

If you plan to claim deductions for things like business expenses or charitable donations, start keeping track of your spending right away. Use an app like Quickbooks or Total Office Manager (TOM), spreadsheet, or old-fashioned notebook to track your expenses, so when tax time rolls around, you’ll have everything in order.

Plan for Upcoming Tax Law Changes

Each year, tax laws can change, so it’s important to stay informed. For example, there may be new tax credits, deductions, or changes in tax rates. By reviewing tax laws early in the year, you can make adjustments that could help you save money when you file. A good tool to use is the Tax Updates and News page on the IRS website.

Conclusion

The earlier you can get organized and plan for taxes, the better. By gathering documents, reviewing your withholding, and making smart financial decisions now, you’ll make the tax season much easier on yourself. Stay proactive and you’ll avoid any last-minute stress when tax time arrives.